Retirement Savings:

Better Information and Sponsor Guidance Could Improve Oversight and Reduce Fees for Participants

GAO-09-641, Sep 4, 2009

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American workers increasingly rely on defined contribution (DC) plans like 401(k) plans and individual retirement accounts (IRA) for retirement income. Together with other DC plans--401(a), 403(b), and 457 plans--these accounts hold about $7.1 trillion. As workers accrue earnings on their investments, they also pay a number of fees that may significantly decrease retirement savings over the course of a career. GAO examined: (1) the types of fees charged to participants and investments of various DC plans; (2) how DC plan sponsor actions affect participant fees; (3) how fee disclosure requirements vary; and (4) the effectiveness of DC plan oversight. GAO reviewed laws and regulations and consulted with experts, federal officials, service providers, and six plan sponsors.

Participants in DC plans and IRAs generally pay the same types of fees, regardless of the plan in which they are enrolled, such as investment management fees. However, participants in some plans are more likely to invest in products that may have higher fees. For example, we found that participants in 403(b) plans and individual IRAs are more likely to invest in products like individual variable annuities or retail mutual funds, which frequently charge more than other investments. According to experts, one reason for the different investments is that many 403(b) plan sponsors do not make group products available to participants. DC plan sponsors generally take certain actions that decrease participants' fees. Sponsors can help reduce participants' fees by, for example, offering cheaper investment products in which participants may choose to invest, like low-cost mutual funds. Sponsors may also pool assets to obtain pricing advantages. 401(k) and 401(a) plan sponsors frequently pool participants' assets to realize lower fees in mutual funds, but sponsors of 403(b) plans often do not. Instead, many 403(b) plan sponsors keep sponsor involvement to a minimum, which limits the opportunities to pool assets and decrease fees. Fee disclosure requirements vary depending on plan regulations and investment regulations. Sponsors of plans subject to Title I of the Employee Retirement Income Security Act of 1974 (ERISA)--which was enacted in part to protect the interests of employee benefit plan participants--are required to disclose certain documents to participants, which may or may not describe fees. For plans not subject to these laws, such as state and local government plans, some states impose disclosure requirements, and some do not. Fee disclosure requirements also vary based on the type of investment product in which participants invest. The Securities and Exchange Commission regulates some investment products, like mutual funds, while others are regulated by states' insurance agencies. Because different regulators require different disclosures, participants in DC plans and IRAs can invest in similar products but receive different information on fees. Labor oversees disclosure for participants of certain DC plans, while IRS oversees tax laws that underlie all DC plans, but both lack information that could strengthen oversight. Labor is responsible for enforcing requirements for disclosure--which may include fees--and the requirement that fiduciaries for some plans must ensure reasonable fees, and has proposed regulations to improve fee disclosure. However, Labor does not have the specific authority to collect information to help ensure that sponsors of certain 403(b) plans continue to protect participants' interests. While IRS does not oversee fees or fee disclosure, IRS oversees DC plans' compliance with the tax code. IRS does not collect information to easily enforce 457(b) plans' contribution limits and detect violations that may reduce federal tax revenue. In addition, IRS and other regulators do not routinely share information with one another to use resources effectively and help enforce a rule requiring reasonable fees.

Status Legend:

More Info
  • Review Pending-GAO has not yet assessed implementation status.
  • Open-Actions to satisfy the intent of the recommendation have not been taken or are being planned, or actions that partially satisfy the intent of the recommendation have been taken.
  • Closed-implemented-Actions that satisfy the intent of the recommendation have been taken.
  • Closed-not implemented-While the intent of the recommendation has not been satisfied, time or circumstances have rendered the recommendation invalid.
    • Review Pending
    • Open
    • Closed - implemented
    • Closed - not implemented

    Matters for Congressional Consideration

    Matter: Congress should consider amending ERISA to require sponsors to disclose fee information on each investment option in the plan to participants in a consistent way that facilitates comparisons among the options not only for 401(k) plans, as we have previously suggested, but for all DC plans subject to Title I of ERISA. In addition, to help ensure participants in all DC plans receive consistent fee disclosure, Congress may wish to consider state approaches for fee disclosure to participants in non-Title I plans as models for federal requirements for ERISA plans.

    Status: Open

    Comments: As of September 2010, no action has been taken by Congress.

    Matter: Given the absence of direct oversight of safe harbor 403(b) plans, Congress may wish to consider giving Labor the specific authority to collect information to systematically monitor safe harbor plans, which will allow Labor to determine whether any safe harbor 403(b) plans are operating outside the safe harbor guidelines and are subject to Title I of ERISA.

    Status: Open

    Comments: As of September 2010, no action has been taken by Congress.

    Recommendations for Executive Action

    Recommendation: To encourage plan sponsors to take actions that result in participants paying lower fees, the Commissioner of Internal Revenue, together with the Secretary of Labor, should provide guidance designed for sponsors of all types of DC plans to suggest ways sponsors can cost-effectively decrease participants' fees.

    Agency Affected: Department of the Treasury: Internal Revenue Service

    Status: Open

    Comments: In 2010, IRS stated that they will use their customer education and outreach tools to help disseminate information issued by the Department of Labor. Labor stated that they have developed a proposed recommendation that would address fee disclosure. In 2011, Labor issued a final rule on one of its initiatives on fee transparency and will issue a final rule on the other by the end of this year. Specifically, the agency published an ERISA section 404 participant-level disclosure final regulation in the Federal Register on October 20, 2010. The 404 regulation requires that employers and other plan administrators disclose information about plan investments and fees and expenses to workers eligible to direct their own investments in individual account pension plans. The regulation applies for plan years beginning on or after November 1, 2011, which means January 1, 2012 for calendar year plans, with a transition provision for the initial required disclosures. On July 16, 2010, Labor published an interim final rule under ERISA section 408 (b)(2) requiring covered service providers, such as recordkeepers and brokers, to disclose to pension plan sponsors the services they provide, information on direct and indirect compensation they will receive, and, for certain covered service providers, information regarding certain expenses associated with plan investment options. The interim final rule was scheduled to apply to plan service contracts or arrangements in existence on or after July 16, 2011. In July 2011, Labor published a final rule delaying the compliance dates of the 404 and 408(b)(2) regulations to help plan administrators comply with both rules in an orderly and efficient manner, without unnecessarily delaying the access to information by plan participants and plan fiduciaries. The final rule delayed the compliance date of the 408(b)(2) rule to April 1, 2012, and gave plans a flexible transition period for the 404 participant level disclosures of the later of 60 days after the April 1, 2012 applicability date of the 408(b)(2) rule, or 60 days from the first day of the first plan year beginning on or after November 1, 2010 (which for some fiscal years plans may be later than 60 days after April 1, 2012).

    Recommendation: To encourage plan sponsors to take actions that result in participants paying lower fees, the Commissioner of Internal Revenue, together with the Secretary of Labor, should provide guidance designed for sponsors of all types of DC plans to suggest ways sponsors can cost-effectively decrease participants' fees.

    Agency Affected: Department of Labor

    Status: Open

    Comments: In 2010, IRS stated that they will use their customer education and outreach tools to help disseminate information issued by the Department of Labor. Labor stated that they have developed a proposed recommendation that would address fee disclosure. In 2011, Labor reported that it had issued a final rule on one of its initiatives on fee transparency and will issue a final rule on the other by the end of this year. Specifically, the agency published an ERISA section 404 participant-level disclosure final regulation in the Federal Register on October 20, 2010. The 404 regulation requires that employers and other plan administrators disclose information about plan investments and fees and expenses to workers eligible to direct their own investments in individual account pension plans. The regulation applies for plan years beginning on or after November 1, 2011, which means January 1, 2012 for calendar year plans, with a transition provision for the initial required disclosures. On July 16, 2010, Labor published an interim final rule under ERISA section 408 (b)(2) requiring covered service providers, such as recordkeepers and brokers, to disclose to pension plan sponsors the services they provide, information on direct and indirect compensation they will receive, and, for certain covered service providers, information regarding certain expenses associated with plan investment options. The interim final rule was scheduled to apply to plan service contracts or arrangements in existence on or after July 16, 2011. In July 2011, Labor published a final rule delaying the compliance dates of the 404 and 408(b)(2) regulations to help plan administrators comply with both rules in an orderly and efficient manner, without unnecessarily delaying the access to information by plan participants and plan fiduciaries. The final rule delayed the compliance date of the 408(b)(2) rule to April 1, 2012, and gave plans a flexible transition period for the 404 participant level disclosures of the later of 60 days after the April 1, 2012 applicability date of the 408(b)(2) rule, or 60 days from the first day of the first plan year beginning on or after November 1, 2010 (which for some fiscal years plans may be later than 60 days after April 1, 2012).

    Recommendation: To be able to provide improved oversight and ensure participants are not violating tax deferral limits, the Commissioner of the Internal Revenue Service should collect information to allow them to easily differentiate between types of 457 plans.

    Agency Affected: Department of the Treasury: Internal Revenue Service

    Status: Closed - Implemented

    Comments: An IRS official stated that IRS has conducted preliminary discussions about the feasibility of making a change to the W2 form or other means of addressing this issue.

    Recommendation: To help ensure that information about service providers' violations is shared with financial regulators, the Commissioner of the Internal Revenue Service should work with financial regulators to establish a formal memorandum of understanding. Such a memorandum would help instruct agents and would be appropriate for limited occasions when information on service providers can be shared without revealing protected taxpayer information. In addition, the agencies should periodically review and update the memorandum, as appropriate.

    Agency Affected: Department of the Treasury: Internal Revenue Service

    Status: Open

    Comments: IRS stated that they will continue to look for opportunities to work collaboratively with federal regulators.